For the third year in a row, crude oil prices have stumbled in April (-26% in 2010, -17% in 2011, and -10% in 2012 so far). Much has been made of the help this will offer the economy and consumer spending but this is ceteris-paribus linear thinking. There are a few other critical aspects to consider that make many, including Barclays, believe "there is little to the latest price action than the increasingly self-fulfilling prophecy of ‘sell it in May and go away’, exaggerated by market positioning, with broader macroeconomic concerns used as a lightening rod." With crude inventories on the high side and gasoline (and other oil product) inventories relatively low and falling - we would hold our breaths on the recent crude price drop funneling along to the retail pump price anytime soon as there is one critical aspect of the supply-demand equation that many have missed - a period of heavier-than-usual refinery maintenance which while temporary have reduced demand but tell us nothing about the state of final demand. In other words, even if a balance of sorts was achieved in terms of crude flows in March and April due to maintenance, that balance is likely to be disturbed from June onwards. The mainstream media is full of talking-heads on the chronic weakness in US oil demand, but it does not appear to be a real phenomenon according to the steadily improving flow of data and while Greece, Hollande, and US macro data has dragged out macro shorts, it would appear the fundamentals support oil prices higher from here. With the upward-sloping curve in crude to year-end and the relatively small drop this week (-1.2% only in WTI) despite all the derisking, perhaps the market is already starting to realize.
a large part of the apparent weakness has stemmed from a heavier-than-usual global refinery maintenance programme. However, these factors should prove temporary. European refineries are set to return en masse, Saudi refineries, which too have been in maintenance, are likely to run more crude, and Asian crude runs are also slowly increasing. Refineries in maintenance are not a sign of weak final oil product demand. They are the sign of a period in which oil product inventories are likely to fall, but they do not tell us anything about the state of final demand.
3rd year in a row of seasonal weakness...
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Crude inventories remain high (potentially exaggerated by the recent maintenance programs)...
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But Gasoline inventories (also impacted by the refinery maintenance) are lower than normal...
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and Oil vs Gasoline vs Retail pump prices...
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Charts: Bloomberg and Barclays